How much is a user worth?

People talk about the valuation of companies like Facebook and Twitter and invariably mention user growth. But how much is a user valued at? In this entry, I crunch the numbers on the companies that have gone public or are about to.

What numbers?

I decided to look at 3 different values for companies that have gone public already: Their market capitalization (or expected market cap) on the first day of trading, their reported number of users, and their reported revenue.

For the market capitalization number, I either looked at the first trade number if the company has already gone public or took the average of low and high valuation that people have mentioned for the companies that have not yet gone to market. So, for example, if a company is estimated to be fetching between 15 and 20 billion dollars at IPO time, I translated that value as 17.5 billion.

For the revenue and user numbers, I picked up the revenue from the last reported year of operation and got the number of users listed in the S-1 (if an S-1 was not available, I took those and averaged out across 3-4 reports I could find covering the imminent filing for a company).

Based on the values I gathered, I decided to estimate the value of an individual user by taking the market cap and dividing it by the number of users. I also decided to calculate the average revenue per user (ie. ARPU) by taking the revenue number and dividing it by the number of users. This gave us two indicators that can be useful in that it provides both the longer term expected value of a user as well as the current revenue per users, which is a more conservative measure.

All data included here was compiled from public sources, I did not use any internal information for any of those companies so you’re free to go and Google for similar data.

Picking the companies

I picked 5 companies that have or are going public this year: Pandora, LinkedIn, GroupOn, LivingSocial, and Zynga. The reason for picking this list is that they are either the most representative companies for the web 2.0 trend and they are among the most anticipated offerings of the year in the sector.

There are certain oddities that arise out of these picks, however, and I’ve yet to figure out how to account for them. First, while all of the companies are derving the majority of their revenue from the internet, most of them have radically different business models and revenue sources, making it potentially difficult to truly draw conclusion from the aggregated data. Secondly, because we are dealing with some valuation that are not yet fixed for over half of the model, there might be some variance if the market’s mood changes.

On to the table

But I’m sure that most people will have skipped the previous parts to get to this section, the one with the numbers in it. So here we go.

Company Name

Pandora

LinkedIn

GroupOn

Living Social

Zynga

Valuation (in billions)

$2.6

$7.8

$22.5

$12.5

$17.5

Number of users (in millions)

94

90

83

85 (rumored)

232

Revenue (in millions)

$51

$161.4

$713.4

$800 (rumored)

$597

Per User Valuation

$50.98

$86.67

$271.08

$147.06

$75.43

Average Revenue per User (ARPU)

$0.54

$1.79

$8.60

$9.41

$2.57

Looking at this chart, the first thought that has come to my mind is that the average revenue per user does not seem to be horribly out of line with what is expected of an internet business (I’ve often heard that one should strive for at least a $2 ARPU on average.

Another thing that is interesting is how much more substantial the value that GroupOn and Living Social derive from their users. It shows that the coupon business is, at least for now, a license to print money. By contrast, Pandora shows that the online radio business is still a tough one where monetization is much more difficult to achieve.

Trending the data

While I know that these are only very few data points, I wanted to get a rough idea of what some trends might look like. To do so, I decided to take an average and a median for the data:

Average

Median

Market cap (in billions)

$12.58

$12.54

# of users (in millions)

116.8

92

Revenue (in millions)

$464.56

$530.78

User Valuation

$126.24

$106.46

ARPU

$4.58

$3.57

So based on this, one might consider that it is possible to generate between $3.57 and $4.58 per users per year. By the same token, it could be possible that a user is worth between $106.46 and $126.24 over the user’s lifetime to a publicly traded web 2.0 company.

Sorry, but this information is cute, but not particularly valuable since it’s done in revenues and not profit. Since the business models of these companies vary widely, and their margins are very different, it’s really quite difficult to compare those figures. For example, Groupon might count the entire value of the a ‘deal’ as their revenue, whereas their margins might only be 20%. Zynga might actually have a very small cost of goods sold (it’s just software …) and approach 95% gross margins.

So it would be dandy if we could look at the same numbers in terms of some kind of profit margin.

Of course that might be hard because as companies pile into investing for the future, their margins are not necessarily reflective of a ‘current’ user … among other things.

Actually, to most people buying the stock, the difference doesn’t exist. They see those businesses as “web 2.0-type businesses” and so, in that sense, getting a fix on what those numbers are gives us a better understanding of what the market thinks of the industry.

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Sorry, but this information is cute, but not particularly valuable since it’s done in revenues and not profit. Since the business models of these companies vary widely, and their margins are very different, it’s really quite difficult to compare those figures. For example, Groupon might count the entire value of the a ‘deal’ as their revenue, whereas their margins might only be 20%. Zynga might actually have a very small cost of goods sold (it’s just software …) and approach 95% gross margins.

So it would be dandy if we could look at the same numbers in terms of some kind of profit margin.

Of course that might be hard because as companies pile into investing for the future, their margins are not necessarily reflective of a ‘current’ user … among other things.

Actually, to most people buying the stock, the difference doesn’t exist. They see those businesses as “web 2.0-type businesses” and so, in that sense, getting a fix on what those numbers are gives us a better understanding of what the market thinks of the industry.